Most of the commentaries on ESMA’s publication on 30 July 2014 of its Opinion and Advice on the extension of the AIFMD passport have focused on its positive advice for the extension of the AIFMD passport to AIFMs established in Guernsey, Jersey and (when the amended Swiss Stock Exchanges and Securities Trading Act (SESTA) comes into force on 1 January 2016) Switzerland, but not on the impact on the National Private Placement Regime (NPPR).
In choosing to opt for a batched country-by-country assessment of the potential extension of the AIFMD passport, ESMA followed the only practical route, albeit one not contemplated by the provisions of the AIFM Directive.
However, this means that the deadline for terminating the NPPR which the AIFM Directive envisages might have occurred in 2018 has been kicked into the long grass.
THE AIFMD PASSPORT AND NPPR IN PRACTICE
The AIFMD passport was intended to be a simple and cost-efficient process enabling AIFMs to manage and market EU AIFs in another member state, much like the UCITS passport.
However, ESMA notes from the various submissions in response to its November 2014 call for evidence that there is no consistency amongst member states, making use of the AIFMD passport a complicated, time consuming and expensive process.
It is to be hoped that lessons learned from the operation of the UCITS passport and the reforms brought in by UCITS IV will be applied to the AIFM passport when the AIFM Directive comes up for review.
Issue with the passport identified in responses to ESMA include:
- a wide discrepancy in fees charged by regulators
- no standard response times
- additional requirements, such as the appointment of a centralised paying agent in France, and
- inconsistent interpretation of what activities constitute "marketing" (which also impacts the NPPR).
Since member states can choose whether to permit NPPR and are free to impose additional requirements, it is not surprising that there are even wider discrepancies here, with obstacles including lack of harmonisation, compliance costs, differing registration requirements at different time points and ambiguous disclosure requirements.
BACKGROUND - AIFMD THIRD COUNTY RULES
Articles 67 and 68 of the AIFM Directive set out a procedure, the first part of which has been carried out by ESMA issuing its opinion and advice to the European Parliament, the Council and the Commission in July 2015. If it has received positive advice and an opinion from ESMA, the Commission has three months to adopt a Delegated Act (Delegated Act) specifying the date when the rules in Article 35 (which permits EU AIFMs to market non-EU AIFs that they manage under the passport) and Articles 37 to 41 (which permit authorisation of non-EU AIFMs to manage and/or market EU AIFs and to market EU and non-EU AIFs under the passport) become applicable in all member states.
Article 68 then provides that three years after the entry into force of the Delegated Act, ESMA is required to issue a further opinion on the functioning of the passport and of the NPPR and advice on the termination of the NPPR in parallel with the existence of the passport.
If ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition or the monitoring of systemic risk, impeding the termination of the NPPR and making the marketing passport the sole possible regime for such activities by relevant AIFMs in the EU, it must issue positive advice in this regard.
The Commission is then required to adopt a delegated act terminating the NPPR.
ESMA mandates to issue “positive” advice only when ESMA considers that there are no significant obstacles regarding investor protection, market disruption, competition and the monitoring of systemic risk impeding the application of the passport to the marketing of non-EU AIFs by EU AIFMs in the member states and the management and/or marketing of AIFs by non-EU AIFMs in the member states in accordance with the rules set out in Article 35 and Articles 37 to 41 respectively.
It is significant that out of the six initial countries that ESMA considered for its Advice and Opinion, it was only able to give positive advice in relation to three, with the important fund jurisdictions of the US, Hong Kong and Singapore being left subject to further investigation and review.
ESMA states that it does not yet have sufficient information to make a substantive assessment in respect of the domicile of other non-EU AIFMs and AIFs that are marketed within the EU and will assess these in batches in due course.
ESMA states that the European Parliament, the Council and the Commission may wish to consider whether to wait until ESMA has delivered positive advice on a sufficient number of non-EU countries before triggering the legislative procedures foreseen by Article 67(6), taking into account such factors as the potential impact on the market that a decision to extend the passport might have.
If however ESMA had been able to give positive advice in July 2015, enabling the Commission to pass the Delegated Act, and subsequently ESMA were able to give further positive advice in 2018, including that termination of the NPPR would not cause market disruption etc., then 2018 might indeed have been the end of NPPR.
Rather bizarrely, in its report to the European Parliament and the Council on its exercise of powers to adopt delegated acts under the AIFM Directive dated 3 August 2015 (after ESMA had delivered the Advice and Opinion, the Commission states “the empowerment in Article 67(6) is expected to be exercised during 2015”.
WHAT HAPPENS NEXT?
In retrospect July 2015, only one year after the AIFM Directive came fully into force (and indeed before the Directive had been transposed into all member states), was far too early for ESMA to come to any definitive opinion about all than a handful of third countries.
The only three to have “passed” ESMA’s assessment are those where the country in question adopted local legislation that is substantially similar to the AIFM Directive.
This was clearly never going to be the case with the United States, Hong Kong and Singapore. So ESMA states that it does not feel that it has sufficient information on investor protection issues under the US, Hong Kong and Singapore regulatory frameworks respectively and is particularly concerned about market access conditions in the United States.
ESMA goes on to list the jurisdictions of other non-EU AIFMs and/or non-EU AIFs that market within the EU and states that it will assess each of these, but with no particular running order. The list is as follows: Australia; Bahamas; Bermuda; Brazil; British Virgin Islands; Canada; Cayman Islands; Curacào, Isle of Man; Japan; Mexico; Mauritius; South Africa; South Korea; Thailand and US Virgin Islands.
As for AIFMs and AIFs in other countries, including India and China, but ESMA has declined to assess them for the time being either because no MoU has been agreed between their respective supervisory authorities and ESMA or the current level of activity does not justify it.
The Commission is required to start a review on the application and scope of the Directive by 22 July 2017 and, if necessary, propose appropriate amendments. There are a number of issues that ESMA identifies in its advice and review, which may be looked at in the 2017 process.
It is also likely that the third country provisions will be looked at again, particularly as it is not clear that the AIFM Directive permits the grant of third country passports in batches.